Are Costs the Sole Reason Behind Boeing’s Loss to Northrop? – Yahoo Finance

Posted: September 14, 2020 at 7:57 pm

The U.S. Air Force has selected Northrop Grumman Corp. NOC as its company of choice for replacing the nations aging intercontinental ballistic missile (ICBM) system. Consequently, Northrop secured a $13.3 billion deal for performing the engineering and manufacturing development (EMD) phase of the Ground Based Strategic Deterrent (GBSD) program.

Notably, Boeings BA Minuteman II ICBM was thus far the United States chosen land-based nuclear deterrent.

Northrop won the EMD award for GBSD program after completing a highly successful three-year technology maturation and risk reduction (TMRR) phase-one effort as part of the competition. Notably, the team of highly-experienced defense majors involved in the GBSD program, including Lockheed LMT, Textron TXT and L3Harris Technologies LHX, has achieved all TMRR design review milestones on time and on cost.

Moreover, per USSTRATCOMs Statement to Congress, the GBSD Analysis of Alternatives provided decisive analysis that continued life extension of the Minuteman III will be more costly than a replacement system. Also, as more modern deterrent systems become the need of the hour, the existing Minuteman II might not address future challenges and threats to the nations current ICBM force.

While the Minuteman has served as the backbone of the nations ICBM force since 1962, its aging infrastructure, and asset attrition require a comprehensive weapon system replacement beginning in 2028. While this heightened the need for replacement, the U.S. Air Force has remained focused on sustaining its ICBM force at the lowest reasonable cost.

So the cost-effectiveness of the GBSD program along with its state-of-the-art features must have persuaded the U.S. Air Force to choose it as the next nuclear deterrent of the country.

Boeing walked out of this ICBM-replacement competition in December 2019, citing lack of cost competitiveness, as stated by a Reuters report. This was because the jet giant felt it to be difficult to submit a bid for the competition, wherein the cost of replacement was being set at $85 billion by the Pentagons Cost Assessment and Program Evaluation office.

In fact, in a letter to the U.S. Air Force, chief executive of Boeing Defense Space and Security, Leanne Caret said that Northrops Orbital ATK takeover in 2018, which strengthened the companys missile portfolio, might have boosted Northrops cost competitiveness compared to Boeings.

While Northrops Orbital ATK acquisition did boost the company to offer its GBSD program at a cost efficient level, lets not forget the fact that Boeing has already been suffering a cash crunch, following the grounding of its 737 Max fleet since March 2019.

Notably, Boeings operating cash outflow was $2.45 billion at the end of 2019 against cash inflow of $15.32 billion at the end of 2018. Its free cash outflow totaled $4.28 billion at 2019 end against cash inflow of$13.60 billion at the end of 2018. So, by December, when the final bid for the ICBM replacement competition was supposed to be submitted by Boeing, its management had a pretty good picture at hand about the companys weak cash position.

Thus, the impact that 737 grounding had on Boeings cash reserve might have also influenced the companys decision to walk out of the bid.

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Are Costs the Sole Reason Behind Boeing's Loss to Northrop? - Yahoo Finance

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